LNG Pipedreams: Global investors getting cold feet?

The projections supporting the BC Liberals’ prosperity fund rest on the assumption that there will be indefinite demand to buy into BC’s fledgling LNG market. However, as the Common Sense Canadianhas reported, the numbers guaranteeing prosperity to Canadians, while assuring maximum profit for investors, aren’t adding up. The indicators below demonstrate examples of a rapidly shifting LNG market and early signs of hesitation from international proponents.

The BC Liberals are likely considering these factors as they race against the clock to get construction rolling before the alluring, yet ambiguous, projections behind the ‘100 billion dollar’ prosperity fund are a faded memory.

LNG proponents were probably never too concerned that provincial and federal regulatory bodies would be giving them much trouble as they applied to start operation and export. The uncertainty, however, lies in the stability and viability of international consumer markets to justify the significant costs associated with construction and export. From the proponent’s perspective, even after gaining regulatory permits, the risk-benefit analysis continues until the construction of LNG terminals actually starts.

Increasing Competition

As the Canada West Foundation discusses in Managing Expectations: Assessing BC’s LNG Industry, there may soon be more natural gas available to Asia than it needs, and other competitors are based in better geographic positions to access Asian markets.

[quote]Australian projects, although higher cost than originally projected, are much closer to completion than the BC projects. There will also be competition from Africa, the US, and potentially South American and Middle Eastern projects. China also has plans to develop its own shale gas industry, contributing 150 billion cubic metres of new supply by 2030.[/quote]

Energy editor for the Financial Times, Yadallah Hussain states that Canada comprised a smaller percent of total global upstream transaction value in 2013 (7% of total global, versus around 15% in 2012) as merger and acquisition activity shifted to emerging regions where there has recently been prolific deep water oil and gas discoveries, such as Africa (15% of global total in 2013).

Canada will face pressure to design an export tax and royalty regime that can compensate proponents for the added costs required to compete with facilities in closer proximity to Asian markets.

Early Stages of an ‘Asian Buyers Club’: Getting More for Less

There is no arguing that demand for LNG in Asian-Pacific markets has resulted in high LNG prices – the question now is how long will they last.

On December 5th-9th, 2013, countries importing 69.3% of the world’s LNG met in New Delhi to discuss how to get a better deal on LNG. India called on large consumers in the region like China, Japan and Korea to forge an Asian buyers’ block to extract price discounts. The Financial Postreferred to this conference as “the early stages of an Asian buyers club”:

[quote]Most LNG is bought on long-term contract and it is the cost of these supplies that Asian buyers are trying to reduce. They also want to delink contracts from oil prices and eliminate the clauses that restrict the destination of shipments and prevent them from selling excess cargo.[/quote]

The article cites the historical precedent of the formation of the International Energy Agency, which was set up by western economies to counter OPEC after the first oil shock in the 1970s.

Anyone Feel Like Sharing?

The majority of proposed LNG projects in BC are located in the Prince Rupert and Kitimat areas on the province’s north coast, an area which intersects with the traditional territories of several First Nations in the region. While the duty to consult rests with the Crown, the procedural aspects of this legal obligation are often delegated to the project proponent. This means that the proponent must be proactive in engaging with potentially affected First Nations.

[quote]If it is determined that the project will have impacts on local First Nations, the Crown and project proponent may be required to accommodate Aboriginal rights or interests. At law, accommodation can include mitigating, minimizing or avoiding adverse effects of project activities on Aboriginal interests. A common business practice that has evolved in various industries across Canada is the negotiation of so-called impact and benefit agreements (IBAs) between project proponents and First Nation groups. IBAs aim to provide benefits to the local Aboriginal community and may include training and business opportunities, profit sharing, equity participation and other economic incentives.[/quote]

While this is a fundamental and important aspect of Canadian law, it may not be all that appealing to international project proponents scouting their options to develop LNG facilities in a location that will allow them to transport the resource to Asian-Pacific markets with maximum gain and minimum effort.

‘Drastic Drop in Volume’ of Merger & Acquisitions Activity

After allowing China’s CNOOC Ltd. to buy Canadian energy firm Nexen Inc., Harper brought in new rules outlining that state-owned companies will only be able to buy majority stakes in Canadian oil sands in exceptional circumstances. Uncertainty regarding the precise nature of these rules is causing hesitation in foreign investors looking to invest in Canadian oil and gas, including LNG.

Alison Redford cites this legislative uncertainty as the impetus for a ‘drastic drop in volume’ of merger and acquisition activity from foreign investors. Yadallah Hussain writes that Canadian mergers and acquisitions plunged 80% last year to US$10.2-billion compared to US$50-billion in 2012, a five-year low, according to IHS Herold Mergers and Acquisitions data. Hussain writes that lower commodity prices and competition from U.S. basins resulted in a reluctance of oil majors to open their chequebooks to acquire Canadian assets in 2013.

So, When Do We Start Construction?

One might think that after Christy Clark was re-elected in a haze of prosperity fund glory that construction of approved LNG facilities would be underway. As Brent Jang writes for the Globe and Mail, the NEB has already granted export licenses for seven BC LNG projects and is reviewing applications from another five. Kitimat LNG, for example, has all the necessary approvals to start construction but has not done so yet. Jang explains proponents have stated that approved projects are not yet in construction stage because they are still doing “internal assessments on the economics of proceeding”.

In a rapidly shifting economic climate, these internal assessments may result in cost-benefit analyses that see the BC Liberals’ prosperity fund projections go down in economic history as a nothing but a pipedream.

Anna C. Novacek earned an Honours LL.B from Durham Law School in England and has interned with West Coast Environmental Law in BC. Today, she works at Stevens and Company on Vancouver Island and co-publishes the Energy Law BC blog.

I would not say there has been a “drastic drop in volume” of foreign investment and or merger’s and acquisitions…. as Redford Claims and is cited here, based on Harper’s actions.

Instead and as published elsewhere here, we have seen that the two monolith deals of CNOOC and Petronas, have just begun to spread their wings and we are now seeing (as I have been writing) that they had less to do with the tarsands and were more about our gas.

Petronas will sell half of their stake in their Canadian play for more money than they paid for Progress energy…. and effectively end up owning a controlling interest for absolutely no money.

They are selling a 25% stake to an Indian SOE and already have sold 10% to a Japanese SOE, both of which are destination markets and are in for the whole ride from our fracked wells to their citizens and customers.

Petronas, Asia’s most profitable company according to the fortune 500, doubled their money on these two deals and that is how they will remain with a controlling interest while at the same time recouping all of their upfront purchase and investment in Progress.

They need only sell 12% more.

CNOOC to is already sniffing around all the LNG plays in BC and was one of the latest to submit for an export license of Herculan amounts of gas…. I thought they were just gonna merge with existing plays and licenses and offer their FIPPA protection for sweetheart deals that Texan and Malaysian based companies could not, but that was clearly not enough for them as they require “half our gas” according to Christy Clark. (which equates to double the current LNG production in Australia third largest producer in the world).

So in the end markets matter not… or market pricing, as these massive giveaways are such sweet deals for the foreign SOEs involved it hardly matters what market forces rain down on us. That free hand of the market stuff will only be used as an excuse to not fill the promised prosperity fund and to ensure we pay more and more for domestic consumption.

All this whining and delays are all about who wins and who loses… and we are about to find out that BC loses. Surprise!